International equity investing has become a central pillar of modern portfolio construction. For asset owners seeking diversification, income and exposure to different economic cycles, non-UK equities are no longer a tactical allocation but a strategic one. Interest in global markets among portfolio investors and managers remains strong – and rightly so.
But there is an uncomfortable gap between how the industry talks about international investing and how it actually manages it.
For decades, the focus has been on fund structure, asset allocation and security selection. Those elements remain essential. Yet the increasing complexity of cross-border investing means that another dimension now deserves equal attention: the operational frictions that occur before and after trades are executed. These frictions may appear administrative, but they have a very real impact on total returns[i].
A minority of asset managers already recognise this. But across much of the rest of the industry, these issues are still treated as back-office mechanics rather than as drivers of investment outcomes.
That mindset is becoming harder to justify.
Some parts of the risk landscape are familiar, such as currency volatility. Even where exposures are hedged, the operational demands associated with managing collateral, counterparty relationships and settlement deadlines add layers of complexity to portfolio management.
As for geopolitical risk, tariffs, sanctions and shifting trade alliances can quickly reprice entire sectors – particularly those tied closely to global supply chains such as autos, industrials and semiconductors. And cross-border investing multiplies the number of accounting standards, reporting frameworks and disclosure regimes that analysts must interpret. Finally, investors may believe they are achieving diversification through international indices, yet the reality can still be heavy concentration in a small number of sectors or mega-cap companies.
These are familiar risks. What receives far less attention is administrative and processing friction.
Foreign equity investing should be viewed as an operational supply chain. At each stage of that chain – from trade settlement to dividend processing – value can leak if processes are inefficient or poorly governed. These losses rarely make headlines, but over time they accumulate.
One of the most significant examples is withholding tax on cross-border dividends. Custody providers consistently highlight that the compilation and submission of withholding tax reclaims sits at the more administratively burdensome end of investment operations[ii].
Yet the financial consequences of getting it wrong are substantial. In higher-yield markets, ineffective reclaim processes can quietly remove meaningful basis points from annual total returns while introducing tracking error against benchmarks that assume treaty rates or efficient recovery.
Analysis of representative portfolio structures illustrates the scale of the issue. According to TaxTec analysis, US investors holding a typical allocation to European equities could lose around 34 basis points of rightful dividend income if tax reclaims are not executed effectively. For Japanese investors, the loss rises to roughly 43 basis points[iii].
Regulators are beginning to acknowledge these inefficiencies. In Europe, the EU’s FASTER directive aims to streamline withholding tax procedures and accelerate recovery timelines. But meaningful harmonisation across markets will take years to materialise[iv].
Other operational processes carry similar risks. Corporate actions remain a frequent source of NAV errors because they combine dense information flows, strict deadlines and widely differing market practices. Even as standards such as ISO 20022 improve messaging consistency, robust governance is still required to ensure elections are processed correctly and entitlements match expectations.
Valuation governance has also come under greater scrutiny[v]. Regulators increasingly expect fund administrators and managers to demonstrate clear oversight of pricing sources, challenge procedures and stale price controls – requirements that become more complex when portfolios span multiple jurisdictions and time zones.
Within European fund structures, depositaries provide an additional layer of protection[vi]. Effective cash monitoring can identify misdirected dividend payments, erroneous tax deductions or settlement discrepancies before they contaminate the fund’s net asset value. In cross-border investing, these controls are not simply compliance requirements; they are performance safeguards.
The conclusion is straightforward, even if it remains uncomfortable for some parts of the industry. Foreign equity returns are earned twice: first in markets, and then in operations.
Encouragingly, investors themselves are becoming more alert to this reality. Institutional allocators and wealth clients increasingly recognise that friction-free operational processes – from corporate actions handling to withholding tax recovery – are essential to achieving the returns that global diversification promises.
For fund managers, this represents a strategic opportunity. Firms that engage seriously with the management of operational frictions will deliver more reliable net returns, greater transparency and stronger client satisfaction. Those that continue to treat these issues as peripheral may find that invisible inefficiencies quietly erode both performance and competitiveness.
International diversification remains one of the most powerful tools available to investors. But in a volatile[vii] and operationally complex investment landscape, ensuring those returns make it safely home now requires just as much attention to processes as it does to portfolios.
